Commission plans that don't destroy your margin
A commission plan is not a compensation decision, it is a set of instructions. Whatever you pay on is what you will get, and people are considerably better at optimising against a plan than most owners expect when they write one.
The most common plan — a percentage of revenue — instructs your sales team to close deals at any price. It is usually not what anyone intended.
Revenue commission pays for discounting
Consider a $40,000 deal at a 35% margin, with 5% commission on revenue. The seller earns $2,000 and the business keeps $12,000 of gross profit.
Now the customer pushes for 10% off. At $36,000 the seller earns $1,800 — they lose $200 and close the deal. The business keeps $8,600, having lost $3,400. The seller made a perfectly rational decision inside the plan you gave them.
| No discount | 10% discount | Seller loses | |
|---|---|---|---|
| Revenue | $40,000 | $36,000 | |
| Gross profit | $14,000 | $10,000 | |
| 5% of revenue | $2,000 | $1,800 | 10% |
| 14% of gross profit | $1,960 | $1,400 | 29% |
Both plans pay roughly the same on a full-price deal. They behave completely differently the moment a discount is on the table, which is the only moment that matters.
Pay on what you actually want
Gross profit is the right base for most businesses, because it aligns the seller with the P&L. Where that is impractical — if margin data is not available at the point of sale — a revenue plan with discount guardrails is the workable alternative: full commission at list, reduced beyond a threshold, approval required past a floor.
A few other alignments worth building in:
- Pay on collected, not booked. A sale to a customer who never pays is not a sale. Paying on collection — or clawing back after a threshold — puts the seller on the same side as your receivables.
- Pay new and renewal differently. Winning a customer is harder than keeping one, and paying identically for both overpays for renewals while underpaying acquisition.
- Keep accelerators above target, not below. Higher rates past quota cost you only on the upside and are the cheapest motivation available.
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Model the cost before you launch it
Run the plan against last year's actual deals before anyone sees it. You want three numbers: total cost at plan, at 80% of plan, and at 130%.
That last one is where plans break. A generous accelerator that looked reasonable at target can become unaffordable in a good year, and cutting a commission plan mid-year after someone has performed is about the most damaging thing you can do to a sales team.
At 80% of plan
$74k
total commission cost
At plan
$108k
what you budgeted
At 130%
$186k
check you can afford success
Simple beats clever
A seller has to be able to calculate their own commission in their head, during a customer conversation, to make good decisions in the moment. If the plan needs a spreadsheet, it will not change behaviour — it will just be resented, and it will produce arguments at every payout.
One base, one rate, one clear accelerator. Review annually alongside pricing, change it at a year boundary, and give people notice.
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